Oh, what an uncomfortable situation for you all! I imagine your daughter understands most of what you say, and can probably communicate some of her own thoughts. I would be inclined to start by keeping up the wash cloth baths and gradually desensitizing her by several means:
1. Empathize with her. Don't tell her she shouldn't be scared or that there's nothing to worry about, because that's obviously not her actual experience. Tell her, "Oh, yes, honey, I can see how scared you are. You just noticed that sometimes water feels different, and much bigger, than your bath."
2. Help her remember, when she's NOT anywhere near bath time, that she enjoyed her baths: have a doll or puppet act out bath time games, and have her wash them, IF she likes, in a dry bath (plastic tub), and then gradually introduce a few inches of water over repeated sessions.
3. Give her water-oriented games to play. An ice-cube tray with different food colors in the cups, with a small spoon, Q-tips, or paper towel to mix colors. A shallow tub with boats, rubber duckies, floating balls, cups and pans. A water pistol on a warm day, or a lawn sprinkler. Supervise her closely so she won't have any mishaps that might frighten her further.
4. If you can find books or cartoon videos that show characters enjoying water, but are not too overboard with it, she might tolerate those.
5. When using the washcloth at the sink, start letting the sink fill more and more over a few weeks. Assuming she washes her hands without panic, try introducing more water then, too.
6. There are kids who don't tolerate soap well and get washed with water only. A wet washcloth may not do a perfect job of hair-washing, but it will probably be good enough. I even read an article lately that washing hair really isn't necessary (though may take some adjusting to). If her hair is long, you might consider a cute, short hairstyle until she gets beyond the panic.
If all else fails, I have read that a couple of moms on this site have simply held their kids down and bathed them until the fear gradually collapsed under its own weight. Since the emotional outcome of that may be unpredictable, though, I'd want to start with a gentler approach. I sure do wish you all happy bath time.